Written by

G. Chambers Williams III

The Tennessean

TIMELINE

Mid-2011Sardar Biglari quietly starts buying Cracker Barrel shares. The company’s stock is trading at just over $40 per share. Fall 2011Biglari pushes Cracker Barrel management for fuller disclosure about its finances. The company declines to release the details, and Biglari pushes for two seats on the board. Nov. 2011Biglari’s first attempt is voted down by shareholders. Aug. 2012 Michael Woodhouse steps down as Cracker Barrel CEO. Fall 2012Biglari makes a second attempt to get on the board, but shareholders reject him a second time. Feb. 2013After increasing his take to nearly 20 percent, Cracker Barrel offers to buy out his stake for $300 million, but he refuses. The stock is trading at around $66 per share. Sept. 2013 Biglari pushes Cracker Barrel to issue a special one-time dividend of $20 per share. He offers to withdraw his nominees to the board if the company accepts. Fall 2013Shareholders prepare to vote on Biglari’s slate for the third time. By November, the stock has topped $110 per share.

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Cracker Barrel Old County Store Inc. shareholders will find out at Wednesday’s annual meeting whether activist investor Sardar Biglari and one of his associates have won seats on the restaurant company’s board of directors.

They’ll also hear whether a majority of investors favor Biglari’s proposal that the company issue a one-time $20-per-share special dividend, which would be financed by Cracker Barrel borrowing as much as $400 million, nearly doubling its current debt. The dividend would cost about $475 million.

Cracker Barrel’s board has urged shareholders to vote against the proposal, although the balloting is only advisory — meaning that even if a majority of shareholders favored the dividend, it would still be the board’s call as to whether to move forward.

“At the recommendation of its Nominating and Corporate Governance Committee, the board voted unanimously against including Sardar Biglari and Philip Cooley on its slate of director nominees” for the shareholders’ meeting, the Lebanon-based company said in late August.

Three shareholder advisory firms — Institutional Shareholder Services, Glass, Lewis & Co. and Egan-Jones Proxy Services — have recommended that shareholders vote for the candidates nominated by the current board, and reject Biglari’s bid to add himself and colleague Philip Cooley to the board.

Through his San Antonio-based Biglari Holdings Inc. and an affiliated investment fund, Biglari controls nearly 20 percent of Cracker Barrel’s stock, making him the company’s largest shareholder. His stake is worth about $475 million.

Conflict of interest?

Biglari filed a notice Aug. 16 that he intended to stand for election to the board again this year, along with Cooley, who is second-in-command at Biglari Holdings. But the board has twice before refused to appoint Biglari and Cooley as directors, during the annual meetings in 2011 and 2012, by lopsided votes.

In its previous actions against Biglari, the board cited a conflict of interest because his company owns two other restaurant chains. There were also concerns over Biglari’s motives. He forced his way onto the board of the Steak ‘n Shake restaurant chain in a similar fashion and soon took over the company, whose name he ultimately changed to Biglari Holdings.

Rather than go along with Biglari’s $20 dividend, the Cracker Barrel board on Sept. 26 announced a $50 million share-repurchase program for the company’s common stock, and declared a regular quarterly dividend of 75 cents per share, which was payable on Nov. 5 to shareholders of record on Oct. 18.

In urging that shareholders vote against Biglari’s dividend plan, Cracker Barrel said, “The board believes the payment of a special cash dividend of $20 per share is not in the best interests of the company and its shareholders. The board urges shareholders to vote against the proposal for the following reasons:

• “The board is keenly focused on effective capital allocation that delivers long-term value to our shareholders, including all alternatives to return capital to all shareholders.

• “A $20 dividend, representing an aggregate dividend of over $475 million, would require a substantial increase in leverage and in the company’s risk profile. Such leverage would reduce the company’s flexibility to continue to invest in and grow the business in the face of changes in market conditions and other contingencies in a way that the board believes maximizes long-term results and enhances total returns to all shareholders.

• “The company’s policies have strongly supported the generation of significant cash from its operating business, allowing the company to triple its annual dividend from an annualized rate of $1 per share in November 2011 to $3 per share currently. This increase was achieved while the company maintained a prudent risk profile and allowed the operating results to significantly enhance the growth in the stock price.”

Critical report

In its report, Glass Lewis criticized Biglari’s management of Biglari Holdings, noting that his company “has failed to generate returns even marginally comparable to Cracker Barrel’s,” and that Biglari Holdings “does not currently pay dividends to its investors … has exhibited poor corporate governance practices and has more recently garnered a significant degree of opposition from its own investors.”

In conclusion, Glass Lewis said: “We believe investors should reasonably consider the dubious corporate governance principles promulgated by Biglari when considering the prospective appeal of electing either of Messrs. Biglari or Cooley.”

The ISS report praised the current management of Cracker Barrel, saying:

“The evidence of the past seven quarters seems to suggest that the company’s investment in its brand, its changes to its menu options, and the changes to its retail merchandise have in fact borne out, and that the growth in revenue over the past two years is the result of a well-managed go-to-market strategy, not a short-sighted pricing action taken at the expense of sustainable growth in customer traffic.”

The Egan-Jones report said of the $20 dividend proposal: “We believe that it would be imprudent of the company at this time to pay the special dividend advocated by the dissidents, thereby substantially increasing leverage and reducing the company’s financial flexibility to invest appropriately in its business in the future as market conditions may change.”

As for Biglari and Cooley’s bid to join the Cracker Barrel board, Egan-Jones said, “We are not convinced that the election of the dissidents’ slate to the board of directors would work to the benefit of all shareholders. We believe that the dissidents have failed to make a persuasive case that their joining the board would work to maximize the value of shareholder value.”

Biglari has attempted to bolster his position by creating a website aimed at shareholders, outlining his criticisms of Cracker Barrel management and making his case for the special dividend. The website is www/enhancecrackerbarrel.com.

On that website, shareholders were urged to send in Biglari’s “gold” proxy ballots supporting his positions, rather than voting the white ballots sent out by the Cracker Barrel board.

Cracker Barrel’s stock closed at $111.92 a share on Monday, off 28 cents. The 52-week high is $115 a share; the low is $60.07.